Studies in credit constraints and economic behavior

Abstract: This thesis consists of four self-contained essays.Essay 1 (with Sten Hansen) investigates the effects of financial deregulation in the mid 1980s inSweden on the investment behavior of firms. An Euler investment equation, including adjustmentcosts of capital and agency costs of debt, is estimated on a large panel of Swedish manufacturingfirms over the period 1979-94. The results suggests that debt financing is associated with agencycosts, and that small firms face higher agency costs than do large firms, controlling for the degreeof financial leverage. The evidence furthermore suggests that financial deregulation helped toreduce the agency costs of small firms, while leaving the agency costs of larger firms essentiallyunaffected. Similar comparisons between high and low dividend paying firms were inconclusive.Essay 2 (with Pål Bergström) investigates the influence of financial leverage on firms' hiringdecisions in the context of a hierarchy of finance model. The analysis is based on the Eulerequation of employment in the presence of convex adjustment costs. We show the empiricalimplications of firms facing a hierarchy of financial costs, and estimate a linearised version of themodel using a large panel of Swedish manufacturing firms. Bootstrap methods are utilized toalleviate some of the estimation problems involved. The empirical findings indicate that theinfluence of financial leverage on firms' hiring decisions differs significantly between firms indifferent financial regimes.Essay 3 uses a consumption based test to examine the importance of credit constraints foraggregate consumption behavior, and the degree of capital mobility across the Nordic countriesover the period 1968-96. In particular, the effects of financial deregulation in the 1980s areexplored. The empirical results indicate that Nordic financial markets are highly integrated, butthat a significant part of the Nordic population is constrained in consumption by current income.There is no evidence, however, that financial deregulation altered the consumption behavior ofhouseholds nor increased the degree of capital mobility across countries.Essay 4 uses micro data to examine the effects of financial deregulation in the mid 1980s inSweden on the debt portfolios of households. In particular, it tries to assess to what extent the increase in households borrowing that was observed in the late 1980s can be explained within a standard model of portfolio choice. The results suggest that deregulation had little impact on the likelihood that households would hold debt, The effects on households' demand for mortgagedebt also appears to have been small. Deregulation seems to have affected the demand for other liabilities, however.

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